While overspending is a concept many are familiar with, is there such a thing as over-saving? Experts recommend starting to save for retirement as soon as possible to take advantage of compound interest, as well as beefing up an emergency fund — which should cover several months’ living expenses.
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But is there a point where too much savings can be counterproductive? And are there any drawbacks in doing so?
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“We want to be careful with the concept of ‘over-saving,'” said Zach Bromley, partner and financial advisor at Broadway Graham Wealth Partners. “While there’s no one-size-fits-all answer to what constitutes ‘excessive’ savings, a general guideline is to ensure a balance between short-term needs, long-term goals and enjoying today.”
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What Are Signs You Might Be Over-Saving?
According to Bromley, over-saving occurs most often when individuals hoard cash at the expense of other financial priorities or experiences that could enhance their quality of life.
“It’s important to evaluate whether excess savings are hindering progress toward other financial goals,” he said. “So instead of letting excess savings sit idle, you can consider putting them to work in ways that align with your financial goals.”
Although most people agree that saving money is a good financial practice, there is such a thing as excessive saving, said Taylor Kovar, CFP, founder and CEO of 11 Financial.
“Hoarding cash without considering the possibility that inflation would eventually reduce its purchasing power… can also be a form of over-saving,” he said.
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What Are the Potential Drawbacks?
Todd Stearn, founder and CEO of The Money Manual, argued that while most of the conversation around retirement is about people who either haven’t saved or haven’t even started, there’s definitely such a thing as saving too much for retirement.
And this can be a problem, because it could result in an increased tax burden, he added. In addition, this could also translate into missing out on things you could have been doing with that money to enjoy or improve your life, he said.
Another type of over-saving involves putting too much money in a savings account.
“First, make sure you’re getting the best rate you can for your savings. The top high-yield savings accounts are paying over 5% right now, vs. a national average of 0.57%,” Stearn said.